Tuesday, January 24, 2006

Inflation's Intimidating Return in South America

In the last two weeks newspapers and magazines in Argentina and Brazil have been commenting on the growing rate of inflation in both countries. Moreover, in Argentina, Ernesto Kirchner's government attempted to establish some mechanism to prevent sudden changes in the prices of key products.

Kirchner's efforts, however, confronted an unwilling Sociedad Rural Argentina, a powerful association of meat and grains producers that has a long history of confrontations with the current president that reached a peak when in the (austral) winter of 2004 the President decided not to assist to the yearly expo and convention of "la Rural," as the association is popularly known.

With La Rural other two major groups (the Confederaciones Rurales Argentinas and the Centro de Consignatarios de Hacienda) representing most of the 190 thousand meat producers in Argentina rejected the agreement proposed by Felisa Miceli, the Economics Minister. Soon after La Rural's rejection, Aníbal Fernández, the Interior Minister announced that the Argentine government will not hesitate to increase the taxes that the Argentine national government imposes on meat's exports.

How rejecting an agreement to limit increases on the price of the meat connects with the need to raise taxes is--at least to my mind--impossible. Taxes should never be tools to punish unwilling political or social actors, much less economic agents and yet--in its desperation to prevent increases in the rate of inflation--the Argentine government seems to be willing to go down a road that will only increase the level of conflict and distrust in its ability to conduct the economy, which ultimately will lead to more tension, distrust, and yes, more inflation.

Despite the partial failure with the foodstuffs producers, Kirchner's ministers have been able to sign agreements with U.S. based Procter & Gamble and with the Molinos firm, that produces and distributes all sorts of foods, breads, and groceries in Argentina. Procter & Gamble will freeze the prices of 31 of its products and Molinos will do it with 9 key products (oil, rice, bread, and pasta).

In Brazil things are not easier for the government of former labor leader Luiz Lula da Silva. On the one hand, the prices of fuel keep growing despite the efforts of the Brazilian government to reach an agreement with the producers along the lines of the one negotiated with the meat producers in Argentina. The key price of the hydrated alcohol went from R$ 1.724 on January 14, to R$ 1.735 on January 21, as a sign of the weakness of an agreement that included this critical type of fuel for the Brazilian market.

As a consequence, the Brazilian equivalent of the Federal Reserve Bank, the Banco Central do Brasil issued a less than optimistic forecast for the Consumer Prices' Index. Two weeks ago, the Banco Central forecasted a 4.58 yearly for 2006. One week later, the Index had gone to 4.61 yearly for 2006, with a rate of growth for the year of 3.5. It is important to notice, however, that for the twelve months going from November 2004 to November 2005, the Banco Central set an inflation rate of 6.22 per cent.

The inflation rates in both Argentina and Brazil still far from the rates reached by the mid and late 1980s that forced the shock plans, but they prove that there is something wrong in the economies of both countries and that the work of the political leaders is not enough to induce the trust to help prevent any new growth of the inflation. Both countries and Latin America at large are aware of the consequences that inflation had for the markets in the 1970s and 1980s and yet, trapped in the labyrinth of populist politics á la Chávez, the political leaders leaders of the region seem to be unable to find the right combination to secure growth and to avoid inflation.

If you are interested on the issue of inflation you can also read from the Archives of this website:

Latin America before the Neo-Liberal Wave

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Monday, January 16, 2006

Parallel Presidencies?

This weekend, two issues overwhelmed Latin American news services. On the one hand, the public relations blitzkrieg launched from La Paz, Bolivia, by former coca-growers’ leader and new President Evo Morales. Hurricane Evo visited four continents in the short period between his election and his inauguration. In some cases, he brought relief, as in Brazil, as Morales seems to have changed his mind about expropriating several oil refineries of Brazilian capital, and in some others, as in Mexico, heightened concerns about the future of Bolivia and its role in the Latin American relations, as Morales hinted the possibility of limiting the exports of gas to Mexico.

On the other hand, in Chile it was all about good news. Michelle Bachelet not only confirmed her success in the presidential election, as hinted in the first round of the elections, but she was able to increase the margin of support for the Concertación, expanding the base of social support for the coalition that Christian-Democrats and Socialists have maintained in Chile for almost 20 years now.

Both electoral stories provide interesting hints about the possible future of the rest of the region. On the one hand, Morales faces challenges that seem to overwhelm him. Not only he already is backing away (for good) from offers made during his presidential campaign, but he has decided to ignite other conflicts in the region with a rhetoric that seems carbon copied from, and in some cases more radical, than Hugo Chávez’s. The difference is that Venezuela never actually confronted a major process of structural reform, while Bolivia confronted the exact opposite situation.

It should not come as a surprise that in one interview with Argentine newspaper Página 12, Morales expressed nothing but rejection for the policies sponsored by the International Monetary Fund. It is important to stress, however, that the tragedy of Bolivia during the 1990s was co-written by the IMF and local politicians as Gonzalo Sánchez de Lozada. Moreover, it is necessary to stress—once again—that in the 1980s and 1990s the IMF sponsored many different policies in Latin America and elsewhere.

The radical policies pursued by Sánchez de Lozada may appear as similar to those sponsored by the Concertación in Chile or by Carlos Menem in Argentina or by Carlos Salinas in Mexico, but there were key differences that is necessary to keep in mind for a meaningful analysis of contemporary Latin America. For starters, neither Mexico nor Chile denationalized key industries such as the oil or copper, while in Argentina and Bolivia, the political elites carried away what in the 1990s were called “Garage sales” of pretty much all within their reach, so to assume that it was only the IMF’s fault is, to say the least, absurd.

Moreover, in Morales's interview with Página 12, Bolivia's new president emphasizes how there are not going to be anymore "imported models," just to talk immediately about the micro-credits program that he will launch. And of course, any person that has read a little bit the programs of micro-lending sponsored by the World Bank, the sister institution of the International Monetary Fund, cannot but smile at Morales's naïve attitude, because even on that policy, he will be following a program brought from outside, revealing once again the pattern of lies that constitute the backbone of the recent wave of Latin American populists. Read here, by the way, a critique authored by Aminur Rahman of such microlending programs in Bangladesh, following a rationale developed by Indian economist Amartya Sen.

Sadly enough, the excesses of liberal (conservative in the U.S.) president Sánchez de Lozada, combined with the structural failure of Latin American presidentialism (and particularly with the Bolivian version of it) had created all the necessary conditions for the emergence of these kinds of nationalist and nativist approaches emobodied by Morales. These nativist approaches assume that only what has been thought in Latin America or more specifically in their own countries is good to deal with delicate issues. Such approach seems out of line, because as rich as the Aymara tradition is it would be ludicrous to assume that a mere return to such roots will guarantee the solution of Bolivia's problems.

Morales will help himself by turning his head to Lima, the capital of Peru, to see the troubled presidency of the other Aymara president in contemporary Latin America, Alejandro Toledo, who assumed the presidency of Peru under similar circumstances to find himself, 4 years, later pretty much unable to do anything with a political leadership that appears exhausted and confronting a disillusioned public opinion.

Here it is important to stress how in Bolivia all the market-centered fallacies of the liberalism (or conservatism in the United States) were applied. The all-encompassing privatization carried by President Sánchez de Lozada left thousands of persons without access to water and other public goods and services, triggering a popular movement to resist any form of market-inspired solution to the issues affecting the Andean country. It should not come as a surprise that the privatization launched in Bolivia has now, as one of its unexpected consequences, the emergence of Morales's charismatic leadership, with all its contradictions and risks not only for Bolivia itself but also for the entire region.

Interestingly enough, on the other side of the Andes, in Chile, Michelle Bachelet—the first female to be president in Chile—appeared with a fresh and conciliatory message in her discourse, and more important without any pretension to have all the answers in the backpack of Chilean or Latin American “culture.”

Quite the opposite, President Bachelet appears willing to embrace more intensely than ever the Chilean vocation to open markets with a very active and very responsible public sector willing to intervene whenever such interventions seems necessary, while acknowledging the role that markets should play in allocating scarce resources.

This is more relevant when one takes into consideration key aspects of her biography. She and her family suffered the excesses of César Augusto Pinochet’s brutal dictatorship. Bachelet’s presidency will be more important because she is the only true socialist in a continent where many populist leaders, as Hugo Chávez or Ernesto Kirchner, disguise themselves as leftists, whithout having gone through the painful experience that represented for the Chilean Socialist Party acknowledging its own mistakes in pursuing its policy goals without paying attention to the delicate mechanisms of the market.

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Tuesday, January 10, 2006

Peruvian Shadows

This Tuesday January 11, the Board of Elections in Peru decided to refuse former President Alberto Fujimori a chance to seek what would have been his third Presidency. The decision hardly surprises anybody, but it provides an excellent chance to see at the painful state of contemporary Peruvian politics.

As with other countries that I have considered in this blog before, I do not think that we should assume that what is happening nowadays in Peru will happen later in Argentina or Mexico. The intricacies of Peruvian politics prevent from any possible contagion, and yet it is possible to see in Fujimori's biography some glimpses of the kinds of things that are wrong region wide in Latin America.

First it is necessary to acknowledge that as repulsive as Fujimori may be for some in Latin America he was able to address critical issues in Peruvian politics that many others before him were unable or unwilling to address. The problem, of course, exists in the kind of means that he used to pursue his goals. For one, we have the case of Vladimiro Montesinos, the former chief of the political police in Peru who gained fame as one of the bloodiest torturers in a region full of them.

In addition, one can think of Fujimori's decision to dissolve the Peruvian Congress and Supreme Court. The "auto-golpe" or "self-coup" as it came to be known in the early 1990s was with his aggressive counter-terrorist tactics and his economic shock plan, the features that gained "El Chino" (The Chinese), as he came to be known, world fame. By the way, if you are interested in Peruvian politics and you like movies, watch The Dancer Upstairs, an excellent movie directed by John Malkovich dealing precisely with aspects of the counter-terrorist tactics used by Fujimori and Montesinos.

These aspects of Fujimori's biography have been the subject of many commentaries and criticism, some of them accurate and fair, some of them exaggerated by Fujimori's foes. What is more relevant, however, is to ask how a former professor in a technical university (Universidad Nacional Agraria La Molina), ended up walking the path Fujimori walked.

To my mind, Peru and Fujimori provide a text-book case to understand what is wrong with presidential regimes and the kind of contradictions that constitute the core of such regimes. I cannot think that a guy such a Fujimori, a college professor in Agronomy, was since his early youth the corrupted and mischievous politician that was forced out of his country to seek refuge in his unique condition as both former President of Peru and Japanese citizen.

Quite the contrary, people who knew the early Fujimori, the one who came to be the president of his Alma Mater, have expressed over and over their surprise with the kind of policies, and more specifically with the decisionmaking processes used by Fujimori as President of Peru.

First, of course his decision to shutdown the Peruvian congress and Supreme Court. He did so after it was clear that his government had no chance to overcome the grip that before him had affected former presidents Fernando Belaúnde Terry and Alán García during their terms. Belaúnde ended up being ousted by a coup back in the 1960s, and García avoided any further confrontarion with the Congress by becoming more radical than the Congress and the leaders of APRA itself.

No wonder, by the end of his term Peru was deep into the worst crisis of its history confronting two choices, Alberto Fujimori as the rather surprising candidate of Cambio 90, and Mario Vargas Llosa, the novelist turned into politician who was unable to defeat Fujimori when El Chino was able to gather the support of García and other leaders of APRA who expected to be able to control his presidency.

Fujimori himself contributed to such perception as his first presidential campaign was based on a bold rejection of the structural reform policies that Vargas Llosa openly proposed to the Peruvian electors. However, Fujimori proved to be a resourceful politician gathering the support of the Armed Forces to launch, rather late when compared with other Latin American countries, an ambitious reform program. The program included not only the usual shock policies to freeze the mounting inflation rate, but also a broad diplomatic effort to recast Peru's relation with the International Monetary Fund, the World Bank, and the U.S. Department of the Treasury.

Fifteen years later, Fujimori is nothing but a shadow of his old self, and sadly, Peru is in no better shape. After Fujimori's exile in Japan, the administration of Alejandro Toledo faced, as his predecessors did, the negative consequences of presidential regimes, making the very process of government almost impossible.

Despite the decision of the Peruvian electoral board it is important to stress that the Fujimoris are coming. Keiko, the former president's daughter and Santiago, the former president's brother are already registered as candidates. It is not clear, however, who will takeover as Santiago running mate, now that it is clear that Alberto will not be able to run as presidential candidate to compete with Ollanta Humala and another shadow from the past, former President Alán García who expects to become the newest of Hugo Chávez's partners in Latin American politics.

The problem, however, is in the institutional designs and more specifically in presidentialism. That is why politicians with different approaches to politics such as Belaúnde, García, Fujimori, and Toledo share all similar fates, similar flaws. It is not in the Peruvian or in the Latin American "culture," but in the rules of a perverse game that we are unable to stop.

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Tuesday, January 03, 2006

Kirchner's Full Payment

Today January 2, 2006, the media in Buenos Aires and elsewhere in Latin America and the United States, call attention on the decision of the Argentine government to pay in full the country's debt with the International Monetary Fund.

The IMF was informed of President Ernesto Kirchner's decision to pay in full in mid December. At that time, the IMF released a brief statement on the issue with little or no comment on the reasons and the consequences of the decision, which is, by itself, a good sign of the ability of the Argentine economy to recover .

In Argentina, the decision has polarized the opinions of economists, politicians, and journalists who have expressed in some cases satisfaction and in some others caution with a decision that leaves the Argentine Treasury with little more than 18 thousand 500 million U.S. dollars in reserves after paying little more than 9 thousand 500 million to the IMF.

To my mind there are two issues that one needs to pay attention to try to understand the reach of this decision and its possible consequences in Argentina and elsewhere in Latin America. More so, because Mr. Kirchner and his ministers have emphasized the idea, rather ludicrous, that they have decided to pay in full as a way to have more "freedom" to pursue their own economic policies.

First, it is necessary to take into consideration that those 9,500 million are only little more than 10 percent of the overall Argentine debt, which—as with most of the Latin American countries—comes from credits with private banks, and not with multinational institutions as the IMF or the Inter-American Development Bank . This is relevant because, actually, the credits with the IMF usually are less abusive than those with the private banks. That is something that has remained absent in most of Kirchner's statements on the issue.

To my mind, if one really wants to achieve more freedom in the design of the economic policy, what is really important is to repay the debt with the private banks and not to seek the easy applause that comes out of slapping the IMF's face. More so, when it is clear that the measure appears as designed to achieve two goals. On the one hand, to fascinate certain leftist media in Argentina and Latin America (one only needs to pay attention to Página 12's take on the issue to understand it) than to pursue a major goal and, on the other, to insist in the rather ludicrous idea that the crises that Argentina and other countries in the region confront are the consequence of the "tight" controls that the IMF impose on the countries.

The fact, however, is that such controls have been rather loose and that is why it has been possible to witness the abuses as that of former President Menem and his one-peso-to-one -dollar policy of the 1990s. One only needs to go over the files of the IMF and other multilateral financial institutions to see how even if at one point the IMF praised the fixed-parity as a way to address the hyper-inflation of the 1980s (5000 percent yearly in 1988-9), there were many warnings about the negative consequences of the policy.

Moreover, many in Argentina and elsewhere insisted in the need to change the monetary policy, but Menem was unwilling to do so out of fear of the possible consequences. Something similar can be said of the rather dumb decision of the Mexican government to pursue a semi-fixed parity in the early 1990s while reducing the fiscal revenue by lowering the VAT rate from 15 to 10 percent in the last two years of the Salinas administration. Neither Menem’s nor Salinas’s policies were imposed by the IMF.

The same can be said of the unwillingness of many governments in Latin America to pursue sound fiscal policies during the 1980s and 1990s. Otherwise, all the countries in region would be either disasters as Bolivia or buoyant economies as Chile. In actuality, however, there are variations that go from the performance of Chile and Mexico to the failure of Argentina, Bolivia, and Ecuador.

However, in contemporary Latin American blaming the IMF for all the wrongdoings of irresponsible politicians is the best way to secure an ovation.

In any case, the question now is what Argentina will do with the “freedom” that— if one accepts Kirchner’s hypothesis—comes after the decision to pay in full the debt with the IMF.

One discouraging sign can be found in the decision of the Venezuelan government to increase its role as financier of Kirchner. Because that is the aspect of Kirchner’s move that has not been really taken into consideration in the analysis. Only during the last three months of 2005, Venezuela bought 1,500 million dollars of Argentine bonds and the expectation is that Caracas will lend more money to Buenos Aires. It will be naïve—to say the least—to think that Hugo Chávez’s government will do it without seeking to impose its own economic agenda on Argentina.

In any case, questions about the future of the Argentine economy remain open. Hopefully, for the sake of the millions and millions of Argentines who have survived the economic catastrophe co-authored by Menem and De La Rúa, Kirchner will pursue sound policies to guarantee a better distribution of the wealth in that country.

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